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Infrastructure Alert - Renewal of Concessions in 2015

Renewal of Concessions in 2015

This is an issue that is shining brightly. At the time of writing on September 16, 2011, this week alone, at least four reports have been published in important national newspapers discussing different aspects on the matter.

There are also numerous speeches being delivered on the subject in various parts of the country. But what is the highly controversial ‘Renewal of Concessions’ really all about? Here we will try to provide a general overview of the subject.

Firstly, we should understand the legal basis of the issue. We can start with the Federal Constitution:

Art. 175.: The Government is responsible for providing public services, either directly or under regimes of concessions, always through public bidding, in the form of the Law.
Sole Paragraph. The law shall provide for:
I – the regime for companies that have concessions or permissions to provide public services, the special character of their contracts and of their extension and the conditions for lapse, supervision and termination of the concessions or permissions…

And what does the Law have to say about those concessions which were not subject to bidding, the so-called “old concessions”?[1] In 1995, two laws: one saying that once their granted period had terminated, these concessions should go to bidding [2]; the other, later law[3], allowing for an extension of up to 20 years (or in other words, until 2015). In 1996, a new Law was published that came to be known as the Aneel Law (since it created the National Electrical Energy Agency), and which allowed for successive extensions[4]. Completing the picture, another law was published in 2004[5], revoking article 27 of the Aneel Law and bringing back the 20 year limit on renewal. In fact, part of these old concessions were regrouped and have gone into privatization, obtaining a concession period of 30 years, whilst part were renewed for 20 years. It is the latter which are the subject of debate here.

With foundations in this legal basis, the camps are basically divided into three large groups.

The first two, which are in the minority, represent the two extremes of the spectrum, affirming that either (a) renewal will not be possible under any circumstances, since the constitutional system would always demand bidding, whilst a third party could always present a better proposal; or (b) a mere alteration of ordinary law would be needed to allow for the extension of the old concessions, since there would be other hypotheses within which the renewal could be admitted. This camp has adopted as their leading argument the allegation that the alterations made up until present have been made under ordinary norms.

The majority position, which it appears should be adopted, speaks of the obligation for an alteration in the content of the constitution. According to the proponents of this point of view, article 175 requires that bidding take place in order for an extension to be acceptable. As such, it would only be possible to consider an extension of concessions which do not go to public bidding in the event of a constitutional amendment. A Proposal for Amendment of the Constitution has been presented with a view to allowing renewals. But even this solution has given rise to opposition, in that it would attack the principle of equality.

It so happens that there are in fact a number of opposing interest groups involved in the debate.

The Federal Union’s interest is to maintain the concessions with the companies, or in other words, renew the concessions.

It is also in the interest of the owning States to extend the concessions, be it to maintain the concessions with the companies, or be it to increase the value of those state-owned companies which are currently concessionaires, in order to privatize them for a much higher value in the future.

Private investors either support renewal, if they hold concessions considered to be “old”, or seek investment opportunities.

The consumers would prefer to see a reduction in the values (which would lead to non-extension), or the continuation of established services (the non-renewal could lead to a scrapping of the industry).

To these groups can be added politicians who intend to wave the flag of renewal as one of their campaign platforms.

These issues are currently of such great importance since they concern almost 22,000MW of generated power (20% of the entire sum generated in the country), 73,000km of transmission lines (practically 80% of the installed facilities) and 37 distribution concessionaires (33% of the regulated contracting sector).

Besides the simple renewal of concessions, however, the confirmed regulatory rules are also under debate, from the regulatory model for assessment and the procedures for returning assets to the State previously held by concessions which have expired to the depreciation and accounting of the concessionaires’ assets, since this is a unique opportunity for important issues to finally be resolved, an outcome which would improve the stability of the regulatory framework of the Brazilian energy sector, otherwise, we will have to face up to these same issues in a few years time.

Sincerely,

INFRASTRUCTURE DEPARTMENT
FELSBERG E ASSOCIADOS
_______________________________
[1] Those concessions which have already been bid for lie outside this discussion. These old concessions generate what is usually referred to as “old energy”, since their assets would be amortized.
[2] Law 8.987/95, art. 42, § 1º
[3] Law 9.074/95, art. 19
[4] Art. 27 of Law 9.427/96
[5] Law 10.848, arts. 8 and 32 (art. 8 altered art. 4 of Law 9.074, reintroducing the renewal limit of 20 years).

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